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The Buying Process
On the Real Estate page I promised more information about using a bank trust, or
"fideicomiso" in Spanish, to buy real estate, - "personal property", not "real property" because only trust rights may be
purchased - in areas known as the restricted zone. The restricted zone, or prohibited zone, encompasses that real
estate which is located within 50 km of the coastline, or 100 km of the Mexican border. Foreigners are prohibited by
the Mexican Constitution from purchasing direct ownership in real property within the zone. Following these steps and
the process outlined will ensure that your property acquisition is a safe and sound investment.
A foreign buyer or foreign corporation can acquire, inside of the restricted zone, exclusive typical property rights,
such as the right to use, enjoy, improve, give away, and sell, by being the beneficiary of a bank trust. Many buyers,
including Mexican Nationals, even prefer to hold their property in this manner, whether inside or outside of the
restricted zone. All trusts require the approval, or a permit, from the Ministry (Secretariat) of Foreign Affairs.
Buying outside the restricted zone
If you are buying real estate in the interior of Mexico, outside of the restricted zone, a bank trust is not required;
however, you will still need a permit from the Ministry of Foreign Affairs. A buyer is granted Real Rights ("Derechos
Reales") just as any Mexican National is, within the legal system. Otherwise, the buying process is essentially the same.
I will mention that a debate seems to rage on about the payment of a capital gains tax on the sale of property within
the restricted zone in Mexico. You will find more comment regarding this subject on Useful
Links or the Tax Implications page about tax obligations. Suffice to
mention that property outside of the restricted zone may be exempted from a so called capital gains tax; but it’s not
wise to jump to conclusions about having to pay hefty taxes on the sale of coastal property.
Buyers offered a "deal" on "ejido" land should beware – it can not be purchased, regardless of what one may be told.
This is usually agricultural land, much similar to land being frozen at "home" in an agricultural type of land freeze. It is
land sold solely by the government in Mexico.
Bank acts as trustee
The trust is granted for a 50 year period, with a subsequent renewal available for another 50 years. The bank is the
legal owner of the property, but is accountable to the beneficiary (owner) for fulfillment of the terms of the trust, in
every respect, according to Mexican law. The trust is not an asset of the bank, and may actually be moved from bank
to bank should a beneficiary become dissatisfied with the service. The fee to establish a trust is in the $500. range,
and annual trust fees (shop around) should run less. Some banks even offer multiple years at reduced fees.
A real estate transaction involving a bank trust must be handled by a Notary Public, who, in Mexico, has to be a
lawyer. It’s worth noting that all legal documents are required to be in Spanish, but translation services are provided.
Promissory Agreement (Interim Agreement)
Purchase contracts in Mexico require a deposit, with 10% or more (more in the case of new projects) being typical.
What a buyer may find unusual is that it can prove to be difficult to place these deposits in to trust or escrow accounts.
Using escrow accounts is not common practice in Mexico, and hence I would suggest they be acquired in the USA,
Canada, or Costa Rica if necessary, although escrow (and title insurance) services are now offered by Stewart Title in
Puerto Vallarta. It may be necessary that a clause stipulating an escrow account for a deposit be aggressively
negotiated. Some in the industry, or writing about the subject, advocate the use of a penalty clause in the event one
party or the other defaults. A clause of this nature gives rise to a potential collapse of the interim contract and should
be avoided, in my opinion. If the deposit is in trust or escrow, the need for a penalty clause is mitigated.
A promissory agreement – interim agreement in essence - will include all the conditions to which both parties have
agreed, the original deed from the seller, the agreed upon price, and chattels included, as is normal in US and
Canadian contracts. The telephone line, if there is one, can flow with the property - good idea – but a separate letter
is required to that effect for Telmex, the telephone company.
Once a deed, or "escritura", is signed, by the bank trustee in front of a Notary Public, the balance of the purchase
price is due and the property can change hands. Closings can be accomplished in 45 days or less, if all the ducks are in
a row. The buyer should receive a deed or title recorded in the appropriate Public Registry office, much in the same
manner as done in Canada or the United States.
The role of a Notary
The Notary, although paid by the buyer to a transaction, is in fact a representative of the State, a Government
appointed lawyer (Jalisco or Nayarit as it may be) and must act impartially, counseling both parties. As a bank trust can
be assumable, for example, the Notary may counsel a "Cession of Rights" be used rather than drawing up a new bank
trust if, for example, forty-five years remain of the fifty; however, the cost is about the same in each case, and it’s
possible a particular trust may not cede the rights to other persons. Something like assuming a mortgage in the USA or
in Canada, it may not be worthwhile.
In a typical transaction, the Notary requests
- an appraisal of the property for tax purposes;
- from the public property registry, a no-encumbrances certificate based on a complete title search, and
- statements from the respective municipal bodies and treasury pertaining to taxes and utility bills, confirming
payment, and the condo administrator (if a condo) confirming maintenance fees and payment.
An agreement will have to be made concerning the final payment of these items as the closing will occur in the
future - final payment and signature for the deed.
Closing Costs
A buyer would be prudent to budget for closing costs of a minimum 5% of the purchase price on transactions
exceeding $250,000. Now take solace in the fact that property taxes will be nominal (6.5 pesos per 1000), probably
only 10 to 20% of what you are accustomed to paying in the USA or Canada, depending of course on where your
property is.
Title insurance can be purchased to protect one’s self against certain title defects and title fraud; the chain
of title will be thoroughly investigated. Title insurance guarantees marketability of the property, it may be a
requirement of a mortgagee, and the insurer is obligated to defend the owner’s rights in the event of a title dispute,
or will indemnify the owner against loss. A policy for a buyer is not to be confused with one provided by a developer,
which essentially protects the developer, and in an indirect way, the buyer. Firms such as Stewart Title, here in
Puerto Vallarta, can also provide closing coordination, and quotes should be obtained. This fee is excluded form the
cost referred to above, and should be in the range of 0.5% for insurance, maybe slightly higher.
Also excluded from the above cost is the annual Federal Maritime Zone fee if the property is located within
20 meters of the highest tide mark. This fee does not grant exclusivity to the owner for access – all beaches are
accessible to the public in Mexico.
The items related to closing fees are as follows:
- Trustee fees - $450
- Official Appraisal fees, by a Perito Valuador - $300 to $500. + small fee for authorization
- Foreign Affairs permit (SRE) up to $1100
- National Foreign Investments Registration - $285- $330
- Notary Public - .25% to.20% of purchase price
- Property Acquisition Tax, varies by state, 1 to 4%, is 2% of construction appraisal in Nayarit
- Public Registry Rights, varies by state –
- Nayarit - .9% to a maximum of $6950;
- Jalisco - $190
Note that Mexico's value added tax (IVA) of 15% is added to all services.
Developers of new projects may include some of the closing costs in the purchase price.
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